6 worries shaking the market

Factors ranging from the US economy to political turmoil in Iraq and Ukraine are finally starting to rattle bullish investors.

By InvestorPlace Jun 13, 2014 10:32AM

A trader works on the floor of the New York Stock Exchange during the afternoon of June 11, 2014 in New York City. (c) Andrew Burton/Getty ImagesBy Anthony Mirhaydari, InvestorPlace


This historic stock market melt-up of the past few weeks has given way to a new bout of fear and uncertainty. The Dow Jones Industrial Average ($INDU) is tumbling back toward its 20-day moving average for the first time in a month. And the lift we saw after the European Central Bank cut its deposit rate into negative territory has been reversed.


Sentiment had reached historic extremes, on many metrics hitting levels not seen since the 2007 and 2000 market tops. The bears went into hibernation.


But now, a cavalcade of concerns has the bulls in retreat. Let's take a look at them.


The economy

The gap between hope and reality could be clearly seen in the way Wall Street analysts and investors had started to take as gospel the idea that the economic weakness seen in the first quarter was merely due to weather (Barclays Capital is looking for Q1 GDP growth to be revised down to a -2 percent contraction) and that an epic rebound in activity will soon be upon us.


Yet as recently as late May, analysts were looking for the economy to surge 3.5 percent in the second quarter.


Unfortunately, weak retail sales data out Thursday morning is calling that into question. Month-over-month growth was less than expected and so-called "core sales" less autos and gasoline were flat. The consensus was looking for a 0.5 percent rise. The trend, illustrated by clothing sales shown above, isn't good and is calling into question the GDP optimism baked into the market at these prices.


Earnings/valuation

Investors have similarly been very optimistic about the path of corporate earnings growth going forward as well as the valuation multiples assigned to those earnings.


The Street is looking for 5.4 percent in Q2, up from 2.1 percent in Q1, before accelerating to 9.7 percent in Q3 and 10.3 percent in Q4. That 10.3 percent figure is actually an improvement from the 9.9 percent expected at the start of the year. And according to Bank of America Merrill Lynch, analysts are now making more positive than negative revisions to earnings for the first time in two years.

On valuations, Bloomberg recently noted that the S&P 500 ($INX) is now trading at 16.5 times forward earnings (with expectations quite optimistic) vs. 14.8 at the start of February. Moreover, Bespoke Investment Group highlighted that the S&P 500 was recently less than 20 points away from the average year-end target of 20 Wall Street strategists.


The problem is that corporate profitability will be challenged not only by the softness of the overall economy (which will hit revenues) but also from the rising labor costs associated with a tighter job market. Just look at the short-term unemployed as a share of the population (chart below), which is down to levels not seen since the 1950s. These are the folks businesses like to hire first.

No wonder more and more businesses are complaining of a labor shortage and are reporting higher labor costs.


Iraq

In headlines seemingly ripped out of the Bush Administration era, Iraq is back in the news as an army of Islamic militants have captured two major cities in the north (one, Mosul, is Iraq's second-largest city), captured hundreds of millions of dollars from a central bank branch, and have forced the displacement of more than 500,000 citizens. The extremists are from an organization known as the Islamic State of Iraq and the Levant (ISIL), also referred to as the Islamic State of Iraq and Syria (ISIS).


ISIL reportedly has taken the country's largest oil refinery and have threatened to march on Baghdad.

An outright civil war is a rising threat as Iran reportedly sends elite commandos to bolster Baghdad while the Kurdish forces expand their control by taking oil-rich Kirkuk.


Crude oil has soared to nearly $107 a barrel in response -- level not seen since last September -- complicating the situation by pressuring already vulnerable consumers, pushing up inflation (which is already at the Federal Reserve's 2 percent target), and potentially forcing short-term interest rates to rise sooner than expected.


Ukraine

Pushed off the front page but not forgotten, the situation in Ukraine took a turn for the worse Thursday. Natural gas negotiations between Kiev and Moscow broke down amid reports that Russian "rebel" tanks are crossing into Ukraine.

Russia also upped the political pressure on Ukraine by introducing a draft resolution to the UN Security Council condemning Kiev's alleged attacks on residential and civilian facilities in the east.


In sympathy, the Market Vectors Russia ETF (RSX) looks like it could be ready to drop back below its 200-day moving average.


Politics

The upcoming 2014 midterm elections look like they could be even more exciting in the wake of the surprise primary loss of House GOP Majority Leader Eric Cantor to a Tea Party-backed candidate. Whether this is indicative of a broader shift to the right or perhaps an energized Republican base remains to be seen.


But if the GOP takes the Senate, we could see another round of bruising battles between Congress and the White House of issues like the record deficit, the $17.5 trillion national debt, and more that could rattle markets -- as it did in 2011 after the GOP, energized by the Tea Party, took the House.


Currencies

I've written before about the importance of yen carry trades in the market -- where hedge fund types have used a weak yen to fund speculations in stocks and bonds. It has been a major support of stocks over the last few months, but it's starting to unwind now.

There are many reasons for this, from inflation beginning to bite in Japan to Europe's new stimulus push, but what you need to know is that earlier Thursday, the S&P 500 reached a statistical correlation of nearly 97 percent with the dollar-yen exchange rate. That means that nearly 97 percent of the tick-by-tick movement in the stock market was explained by what was happening in currencies.


Not only is that not normal, nor healthy, but it's also dangerous given the technical breakdown I'm seeing in the yen carry trade, with the euro-yen exchange rate in particular collapsing out of a multimonth consolidation pattern.


That will weigh not only on U.S. markets, but Japan's as well in the overnight Asian session.


What's next?

Given the extreme low volatility/extended sentiment behavior of the market lately, the arrival of all these negative catalysts is likely to have a large impact on overconfident investors.

You're seeing that in Thursday's scramble into haven assets like the CBOE Volatility Index as well as precious metals. The Market Vectors Junior Gold Miners (GDXJ), which I've recommended to my newsletter clients and discussed in a recent article, soared 5.8 percent as it jumped over its 200-day moving average for the first time since February.


I think gold and silver could really get a run going here not only on the geopolitical situation but also on rising inflation expectations.


Recent recommendations to clients and readers include New Gold (NGD), up 5.6 percent Thursday and up 11 percent since I added it to my Edge Letter Sample Portfolio on June 5. NovaGold (NG) is up nearly 15 percent during this time.


More from InvestorPlace

Disclosure: Anthony has recommended GDXJ, NGD and NG to his clients.


Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

58Comments
Jun 13, 2014 11:04AM
Jun 13, 2014 11:50AM
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Obama approval down to 38%.  citizens must think he is doing a great job with a number like that.

 

5.5 years later and this is obamas economy.  I hope you all liked this change

Jun 13, 2014 11:09AM
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People are finally talking about the wars in Afghanistan and Iraq again. Since we invaded Afghanistan they have become the #1 producer of heroin in the world and the Taliban uses that money to buy weapons and bombs to kill American soldiers. Before our invasion the Taliban had a very strict no opium growing policy that was very effective but now many poor farmers have no choice but to grow opium or starve. In Iraq our army used nuclear weapons (spent uranium tipped rocket launchers and missiles) which have caused mass deformations and radiation poisoning in the areas they were used. For each civilian we kill (and we have killed many thousands) we make enemies of the common people and feed into the anti american sentiment. These 2 wars have not only cost trillions of dollars and thousands of American lives but have strengthened the Islamist movement and make the world a less safe place. You can say Osama Bin Laden was very successful in his terrorist attack because he drew America into an unwinnable war that would drain our resources and take away our freedom (PATRIOT ACT).
Jun 13, 2014 11:51AM
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scandal after scandal from this obama adminstration.

 

iraq is going to fall to militants, while obama is running around saying the world is at peace.

Jun 13, 2014 1:31PM
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What benefit did we get out of invading Iraq, again?
Jun 13, 2014 2:15PM
Jun 13, 2014 11:20AM
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That is your take Anthony.  Now it is my attempt.  You know I have followed you many years now Anthony and many things we are eye to eye on but not today.  We need and will experience deflation on anything but consumerables like food and energy.  Perishable type stuff.  The purchase of hard goods will be delayed much like our Guberment delays building roads and bridges.  Wages for anyone but the seriously needed and even some of those like doctors are going to suffer deflation as the New World Order requires all wages throughout all economies be on par.  Importing so many goods and allowing; if not outright illegally encouraging this illegal immigration, will do what it is intended and force workers wages lower.  This is the plan and recent events; unless of course you are a pie in the sky believer in what our politicians tell you they are up to versus reality, prove this policy.  What we agree on is that Gold and Silver will rise in price but not because of inflation but because of currency fears.  Some emerging markets like India and China have historically used owning  gold  as a means of immediate wealth and the guess is demand in these economies is being reported to the World Gold Council at a factor of four to one in order to hide their true demand to hold down the price.  Much like a waiter only declares 25% of their tips so do smart gold traders in their demand predictions. The fear of economic collapse better be regarded as a reality as a one world economy will need a one world currency, Dah. I know it is hard for many to understand our Guberment no longer represents we citizens but after the latest events on the border it would be very difficult to deny this except of course for those who live on the political Kool Aid from either corrupt party. People all over this chaotic world will turn to Gold as they have for at least the last 5,000 years of recorded history. Just trust that it is in our DNA to covet the stuff and you can't go wrong. JMHO
Jun 13, 2014 2:07PM
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Pretty much what everyone should say, and everyone KNOWS...??


We got NOTHING, except Billion$ spent and Thousands of lives lost..

Jun 13, 2014 12:51PM
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Hey, Amy a LOT of those involved in 9-11 were from Saudi Arabia. How come we didn't invade THEM?? Too much oil, I guess. And besides, Bush II and his pals were GREAT friends with the Saudi royal family. Of course, since Saudi Arabia was involved, they attack Afghanistan; makes a lot of sense to me [sarcasm here].


You know what the best thing to have done after 9-11?  The US government should have publicly stated all over the world: "We want those terrorists. If you bring them to us [with absolute proof, of course] dead, we'll give you 1 Billion dollars in gold, totally tax-free. if you bring them to us alive [still with the proof, of course] we'll give you 2 Billion dollars in gold totally tax-free and anonymously.


This would have been a LOT cheaper, in MONEY AND MEN, and NOT involved us in any wars. And don't think that some of those other terrorists wouldn't have turned those terrorists in. For THAT kind of money, most people would turn in their grandmothers, believe me.


BTW I got this idea from someone [an author, whom I admire greatly] so I'm not taking credit for this idea, just repeating it.

Jun 13, 2014 1:23PM
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Here are six reasons:

 

1.) Reality

2.) End of cheap oil

3.) Things with actual value

4.) End of growth

5.) Market lies, cheats and swindles

6.) Reality

Jun 13, 2014 2:59PM
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  Every administration from Nixon to Obama has promised energy independence. Those before Obama just didn't have the means to do so. We and the rest of the industrial world need oil resources from the mid east.

  That isn't true today. Good leadership would make a north American energy pact between us, Canada and Mexico while continuing down the non carbon energy road that we have been on for a number of years.

  That would leave Europe to fend for them selves for a change but its time anyway. We spend billions defending their interest from actual defense to keeping oil flowing from the mid east. Japan to.

  Let the mid east fight among them selves, they always have and we are not going to stop them. I feel for the innocent people f these countries but we can't continue to spend our children's lives and futures if they these people are not going to take control of there own countries and futures.

Jun 13, 2014 5:56PM
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GDP going negative is a good indicator.
Jun 13, 2014 3:38PM
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                            The Makings For a "Great Story"


The DOW is over valued.


Wall Street vers. Gold or Silver

They can't both be right at the same time


International Terrorism ..

Syria, Afghanistan, Iraq, Iran, Ukraine  all funded by Russia

While our CIA is being held back


Arctic Ocean:

Cold War, over... A mad rush for the oil & gas rich fields under its waters

War games in Greenland, Denmark, NATO forces aligning , again Russia


World Economy  "On the brink of unraveling" 


 



Jun 13, 2014 5:40PM
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Regarding the comments on Iraq, is this really surprising to any American? Why is it that it always becomes the U.S.'s problem to resolve? What about the rest of the world? What about the U.K., France & other global countries doing their share for a change.  What I don't get is did the U.S. really think that a weak Iraq government was going to be able to repel terrorist activities without continued support for an infinite amount of time?  The whole middle east is nothing but terrorism and breeding more terrorists.  They're like cockroaches - you have to kill all of them or they'll come back again and again and keep multiplying.  And they're the deadliest kind of cockroach.  Ones that have no value for human life. 


The problem is that the American people are kept in the dark - like the proverbial "mushroom".  We're spoon fed by the media and the government controls what the media conveys.  Who the hell knows what is really going on and what has gone on in the past?  How can we believe anything they tell us? Our economy is in the crapper but the government continues to fool us into thinking otherwise. 


 If I were managing the situation in Iraq like any sensible business person should,  I would demand they repay us every dime we've spent to date, including repatriation to the families for all of the unfortunate lives lost.  Control all of their damn oil & resources.   I would never close the option that we and our allies can't go back over there and kick **** again but only if we absolutely have to - and again at their expense.  Our people would have the best of the best - equipment, supplies, care, accomodations and free unlimited vacations for servicemen and their families.


These terrorist problems are never going to end, let's face reality.  But at the same time let's force the rest of the world to do their own fair share of smashing cockroaches. 

Jun 13, 2014 2:22PM
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Where are all the green shoots they used to talk about?Maybe I should stop running over them with my mower.




Jun 13, 2014 11:41AM
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What, no mention of Global Debt Soaring 40% since the Great Recession. Nor any talk about the $700Trillion in Toxic Scam Derivatives Risks floating across the Globe. The Money Pit which Is Iraq and Afghanistan could have been used to fix the Crumbing Infrastructure here in America. If that money was spent here instead of there, we would already be Energy Independent.

The Biggest Longer Term Worry in the Markets is that the Farce which is the 3 Major Central Bankers will cause a Far Bigger Problem eventually then they have prevented in the short term. What is current going on is unsustainable. You cannot have Soaring Debt Levels and dropping Rates over time. The Math simply doesn't work over time. Eventually, sooner then later, Rates will normalize and all Hades will break loose.

Jun 15, 2014 1:31PM
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they should worry about the money going out to the pockets of the market makers relative to the companies profitability that would or would not sustain the stock prices. nothing else to consider otherwise.
Jun 13, 2014 12:28PM
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Amy pichii, "how quickly you forget that we went into afghanistan because 3k+ people died on a single day here in america, and the people responsible were based out of afghanistan.;sigh;"

Well seeing that I once lived in Jersey, no I haven't forgotten. But I also know it's been 13years since then while the Crooks and Thieves that profit off of extended Wars have done little to nothing to improve things over there nor here. Aka the never ending Money Pit. So you really don't have a point in context to what I stated. Meanwhile Folks here at Home are being thrown to the Wolves. We are building their Infrastructure while neglecting our own.

Furthermore, this craziness didn't start on 9/11, it was simply highlighted for every American to see. Then some of the typically evil folks have taken advantage of that FACT to throw money down a never ending Money Pit. We need to get out and stay out of Iraq and Afghanistan. If that part of the world wants to changes things there, let them Foot the Bill and loose more lives. We have more than done our part. While we worry about overrated Terrorist Groups, Russia, China, and eventually India will be eating our Cake.
Jun 13, 2014 4:34PM
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Walljasper.....As soon as The Supreme Court in Nebraska, decides a court action case against the Governor, by landowners and others; They might be able to move forward on building the Keystone XL or rerouting it around the problem area that exist...


This won't happen until probably after mid-term elections and the SC of Nebraska comes back from their break..

Then maybe Obama can okay or deny the building of the K-XL after the first of the year.??

The U.S. State Department has signed off on any and all impacts the K-Line may or may not effect. 

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